Moody’s considers Cyprus exchange of existing domestic government bonds as a default

However, contrarily to Fitch and Standard & Poor’s, which on June 28 downgraded Cyprus to `Selective Default`, Moody’s maintains Cyprus’s rating to Caa3 with negative outlook.

Moody`s, points out that it will revisit Cyprus`s rating in due course to assess the impact of the exchange on the sustainability of Cyprus`s debt burden together with other relevant factors, including Cyprus`s likely compliance with measures that are a condition of external support and its growth prospects.

The debt exchange is in accordance with Cyprus`s commitments under the program agreed with international partners. On Monday 1 July, the Cypriot authorities announced the completion of the exchange of bonds.

Moody`s said it understands that, out of the selected bonds, 67% of the total outstanding amounts was subject to the exchange. The exchange involved an extension of existing bonds maturing from 2013 through 2016 with longer maturities and no change in the bond coupon.

According to Moody`s definitions, this exchange represents a `distressed exchange`, and therefore a debt default. This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Cyprus to avoid payment default in the future.

Moody`s does not use a `Default` or `Selective Default` rating, but rather maintains ratings on securities in default that are indicative of the magnitude of losses to investors.